Economic policy

The economic policy response to COVID-19: what next?

As the public health crisis resulting from the COVID-19 pandemic evolves, the economic consequences are becoming increasingly clear. To stem the spread of this disease, governments and businesses are making political and business decisions that are rapidly bringing parts of the economy to a standstill. Spending will fall rapidly at many businesses as people practice social distancing; businesses are closing, hopefully temporarily; and millions of workers are experiencing a drop in income (whether through reduced hours, furloughs or layoffs), which in turn will put further downward pressure on spending.

So far, the federal policy response has focused on public health. First, Congress authorized $8 billion in funding for health agencies. Second, the House of Representatives passed the Families First Coronavirus Response Act. This legislation will attempt to directly combat the virus and protect those affected by: funding testing, creating and funding sick leave for many workers, and providing funds to states through Medicaid funds. The bill also includes more funding for Unemployment Insurance and Unemployment Insurance extensions, more funding for SNAP emergency benefits and SNAP work requirement waivers, and flexibilities and a funding to ensure young children and school-aged children have access to food during school closures and quarantines. Taken together, these provisions are intended to support broader public health and individual health, but also the economic and food security of American households.

But these first two pieces of legislation will not be enough to address the economic fallout that is the necessary result of the policies and decisions taken to save lives in the short term.

The Federal Reserve has cut interest rates to zero, and while it has other tools to stimulate the economy, a crisis like this requires fiscal and monetary responses. The legislation passed so far has been important, but another round of fiscal policy will be needed immediately to fully resolve this crisis.

A robust fiscal response can provide income support to households, ensure broad and continued access to safety net programs, incentivize employers to avoid layoffs, provide loans to small businesses, provide liquidity cushions to households and businesses, and stimulate economic growth. economy in another way.


  1. Provide income support to a wider range of households. The Family First Act expands access to paid sick leave and unemployment insurance, but far more people are losing income, tips, commissions and hours than helped by this legislation. Too many American households are living on the financial edge and will need help whether or not they meet the eligibility criteria for safety net programs. Potential options for providing income support to households include:
  • Provide cash assistance to current holders of the electronic benefits transfer system (for example, SNAP program participants).
  • Offer Earned Income Tax Credit Bonus Round (Offered by Reps Khanna and Ryan);
  • Reduce source deductions to increase take-home pay (proposed by Claudia Sahm);
  • Mailing of checks to most (or all) households (provided by Jason Fourman) to ensure they can continue to spend on basic necessities and then help kick-start the economy when many constraints are lifted.

These options have different advantages and disadvantages. Leveraging the EBT system would be quick and well targeted. SNAP recipients may be the most needed group to reach (they represent 36 million of the lowest-income Americans before the crisis), but many households would be left out (especially those without children). Changing the withholding tax could also provide income support quickly, but it would only help those with income and do little for those with lower incomes. EITC bonus payouts or direct checks would both be helpful, but can take longer (months, not weeks) and may not be the best first line defense.

A combo option: providing cash to all SNAP households by putting $250 per household member on EBT cards in unrestricted cash (~$10 billion). Also, send household checks for $1,000 per adult (with an income cap that can be applied later as part of 2020 taxes) (~$200 billion) with checks for dependents for $500 , which may take longer to ship (~$50B). the need to match dependents to households. It is important to note that none of these funds should count towards the income thresholds for other public assistance. Congress could also allocate more funds to states through TANF Emergency Block Grants to allow states to support the most vulnerable in a flexible manner (~$10 billion).

  1. Provide liquidity cushions to households and businesses. While the economic consequences of the pandemic are likely to generate a recession, the most acute part (when much economic activity is paused) could be measured in months, not years. Many households and businesses could face temporary cash flow constraints. One option is for the federal government to simply not ask for short-term payments. For example, all student loan payments (not just interest) could be suspended without penalty (or, depending on the loan structure, the government could make the payment to the seller and simply add the payment to the end of the loan). All small business loans guaranteed by the Small Business Administration could be temporarily paid by the government. Tax payment deadlines (both for companies and for individuals who have not filed their 2019 taxes) could be extended by 3 months. None of these actions would stop a recession or even cause a recovery after it, but they could create space for some households and businesses during the acute part of the crisis. Because the government borrows so cheaply, a brief delay in payments is not costly to the government.
  2. Additional Small Business Loans: The Small Business Administration could provide more loan guarantees to businesses. It can, however, be a difficult time for many businesses to borrow, as solvency pressures would make fair underwriting quite difficult for many lenders. Nevertheless, it is worth implementing for companies that qualify for loans.
  3. Grant tax relief to businesses based on the maintenance of the wage bill. Many small and medium businesses could face extreme pressure to reduce hours or employment. As some have noted, household relief is significant but would not necessarily help businesses as many households will limit spending beyond necessities until the public health crisis is over (see Hamilton and Veuger). One way to try to change their incentives — and provide the financial means to keep payrolls — is to give companies tax breaks based on the number of employees working at least 20 hours a week. A specific option is to allow payroll tax credits for up to 100 employees working at least half-time, up to a monthly salary of $4,000. These caps would ensure that the government does not send billions to already profitable large companies or give large per-employee payments to small companies staffed with highly paid professionals. The goal would be to relieve a small business trying to keep its workers on the payroll. For example, a company with 50 employees earning $48,000 per year would receive $250 per month per employee. Reducing hours, wages or employment would reduce payments. This would cost between $50 billion and $100 billion over 6 months, with the bulk going to companies with less than 100 employees. This could be limited to companies that maintain a certain percentage of the payroll, but it could prevent supporting these companies in the most desperate situations.
  4. Provide broader stimulus support to the economy based on economic data. As many have noted, this economic contraction will require household assistance (point 1), but it is impossible to prevent some economic contraction given the social distancing restrictions that are in place. Importantly, given the possibility that the current scenario will generate a deeper recession, Congress should enact policies with automatic triggers that kick in over time if the economy remains weak, including additional payments to households and states. . For example, if the unemployment rate increases and remains high, additional payments to households could be made over time. More funds could go to states through FMAP. More funds could go to infrastructure through BUILD. Last June, the Hamilton Project and the Washington Center for Equitable Growth published a delivered ideas for automatic stabilizers.

Specifically, if the unemployment rate rises by half a percentage point (or if the employment-to-population ratio falls by half a percentage point over the next six months or if the broader measure of unemployment (U6 ) increases by one percentage point), then more direct payments to households could be made to individuals, with another round of payments in a year if the unemployment rate remains high; Maximum SNAP benefits could be increased; unemployment insurance benefits could be increased; and, UI extensions could be automatically enacted. These policies would provide continued support to the economy in the event of a deeper recession.

  1. Congress should continue to fix holes in the safety net and create exceptions for the unique circumstances of the current health crisis. He could forgo disability exams to make sure people with disabilities don’t go to doctor’s offices during a health crisis just to meet a bureaucratic requirement (suggested by Rebecca Vallas). Congress could extend paid sick leave to more employees instead of limiting it to midsize employers. Congress could continue to create flexibility within the Unemployment Insurance and SNAP programs to ensure they can respond appropriately to this crisis. Congress can support child care, especially for health workers or others who must continue to work while schools are closed.

The actions taken by Congress and the Federal Reserve have been significant. It is increasingly clear, however, that there will be substantial economic benefits. More needs to be done to cushion the incomes of affected workers, support small and medium-sized businesses and support the economy more generally.